The 2026–27 Federal Budget put family trusts firmly back in the spotlight. Among the proposed reforms is a new 30% minimum tax on discretionary trusts, including many family trusts, expected to apply from 1 July 2028 if legislated.
For families using discretionary trusts for investments, business assets or succession planning, this could be significant – affecting how trust income is taxed and whether existing structures still do what they were designed to do.
Importantly, the changes are announced but not yet law. Final detail depends on legislation, consultation and guidance over the coming years, so this is a time to understand what’s proposed and review your position – not to make rushed decisions.
One structure may become even more important in future estate planning: the Testamentary Discretionary Trust. While the proposed 30% minimum tax targets discretionary trusts generally, certain testamentary trust arrangements are expected to be carved out – meaning the trust created through your Will may still have a valuable role, particularly where children, blended families, vulnerable beneficiaries or intergenerational wealth transfer are involved.
What’s been announced?
The Government has announced a proposed 30% minimum tax on discretionary trusts – structures where the trustee decides how income or capital is distributed among beneficiaries. Family trusts are among the most common type in Australia, widely used for asset protection, business succession, wealth management and estate planning, as well as distributing income to beneficiaries on different marginal tax rates.
Under the proposal, discretionary trusts would face a minimum level of tax at the trustee level from 1 July 2028. Some exceptions are expected to apply, and time-limited rollover relief is proposed from 1 July 2027 to help some taxpayers restructure beforehand. None of this is legislated yet, so families should be cautious about acting on headlines alone.
How Family Trust distributions are taxed today
To understand why the proposed change matters, it helps to look at how family trust distributions work today. The trustee decides which beneficiaries receive income each year, and adult beneficiaries are generally taxed on their share at their own marginal rate – so someone with little other income may pay less tax than someone on the top rate.
For children under 18, the rules are far stricter. Minors who receive unearned income from a Family Trust are generally taxed at penalty rates once that income exceeds a very small threshold, a rule designed to stop families splitting income with children purely to access lower tax rates. This is one reason family trusts and testamentary discretionary trusts are treated differently.
How Testamentary Discretionary Trusts are different
A testamentary discretionary trust is created through a Will and generally only comes into effect after death – unlike a family trust, which is established during a person’s lifetime. It allows estate assets to be held and managed for beneficiaries rather than distributed outright, with the trustee holding discretion over income and capital distributions as set out in the Will.
These structures can be particularly useful where children are still young, beneficiaries aren’t ready to manage a large inheritance, there are blended family considerations, asset protection matters, a beneficiary is vulnerable or financially inexperienced, or flexibility is needed after death.
They can also carry different tax treatment for minors: where income qualifies as excepted trust income, children may be taxed at ordinary adult marginal rates rather than penalty rates, giving them access to the normal tax-free threshold. That’s not the only reason to use a testamentary discretionary trust, but it’s one reason they remain popular in estate planning.
What may change from 1 July 2028
If legislated, the proposal would ensure discretionary trust income is taxed at a minimum of 30%, reducing the benefit of distributing income to beneficiaries on lower marginal rates. For some family trusts, this could make the structure less effective for tax planning and change how families approach succession, investment structures and intergenerational wealth transfer.
The impact won’t be the same for everyone – a trust distributing to beneficiaries already paying above 30% is affected differently to one distributing to lower-income beneficiaries, and business owners, investors, farming families, retirees and families with adult children may all sit in different positions. That’s why personalised advice matters: the rules are broad, but the practical impact depends on your structure, assets, income, beneficiaries and goals.
The Testamentary Trust carve-out
One of the most important parts of the proposed reform is the expected carve-out for certain testamentary trust arrangements. Based on the Budget announcement, some income from testamentary trusts is expected to be excluded from the 30% minimum tax – significant, because testamentary discretionary trusts are also discretionary trusts and would otherwise risk being caught by the same framework. The proposed exclusion reflects that these trusts serve a different purpose to ordinary family trusts: created through a Will, after death, and commonly used to manage inheritances for children, vulnerable beneficiaries or families with more complex needs.
Caution is still needed. The carve-out has been announced, but its final scope depends on the legislation – it may not protect every trust, every type of income or every arrangement, and details like how assets enter the trust, when it was established and how it’s administered may all matter. Families shouldn’t assume that simply having a testamentary trust in a Will automatically achieves the desired outcome: the Will must be properly drafted, the structure appropriate, the tax treatment confirmed and the strategy right for the family.
Why your Will may matter more than ever
Many people think of a Will as a basic document that says who gets what. In reality, a well-structured Will can do far more – determining how wealth is managed, protected and distributed after death, providing flexibility for beneficiaries, supporting children or vulnerable family members, and helping families adapt to changing circumstances over time.
If the proposed trust tax changes proceed, the Will’s role may become even more important. For some families, existing family trust arrangements may need reviewing; for others, the estate plan may become the more effective place to build flexibility for future generations. This doesn’t mean everyone needs a testamentary discretionary trust – but it does mean families should understand whether their current Will is doing enough. A simple Will may suit some circumstances; where there are children, substantial assets, business interests, blended families or vulnerable beneficiaries, a more sophisticated structure may be worth considering.
What Australians should do now
The proposed 30% minimum tax isn’t expected until 1 July 2028 and isn’t yet legislated – that gives families time, but time shouldn’t be mistaken for inaction. If you have a family trust, business structure, investment portfolio or estate plan involving a testamentary trust, now is the time to start reviewing your position, including:
- whether your existing trust structure still suits your goals, and who currently receives distributions
- whether the proposed 30% minimum tax may affect future planning
- whether your Will includes appropriate testamentary trust provisions
- whether beneficiaries would benefit from more asset protection or flexibility
- whether your estate plan has been reviewed recently, and your accountant, lawyer and adviser are working together
Don’t make changes based on headlines alone – trust and estate planning decisions carry legal, tax and financial consequences, so restructuring a trust, changing asset ownership or updating a Will should only follow a full review of your position.
A prompt to review, not panic
The proposed 30% minimum tax may become one of the most significant trust tax changes in years – but for now it remains proposed, not law, and isn’t expected to take effect until 1 July 2028. The expected carve-out for testamentary trust arrangements is important but shouldn’t be treated as a guarantee; the final rules depend on the legislation.
For families, the message is simple: review early, seek advice and decide carefully. Your trust structure, your Will and your estate plan should work together, and if they haven’t been reviewed in some time, the Budget announcement is a timely reason to start the conversation. If you’d like to understand how the proposed changes may affect your broader financial strategy, or whether your estate plan still reflects your family’s needs, the team at Wealth Architects can help you work through the right questions.
Disclaimer: This article is for general information purposes only and does not constitute financial, tax or legal advice. The proposed trust tax changes are not yet legislated and may change before they take effect. Please speak with a qualified financial adviser and seek independent tax and legal advice before making decisions about your trust structure, estate plan or superannuation arrangements.